John Kerry, recently confirmed as secretary of state, said he would aim to complete the environmental review of the new route of the Keystone XL Pipeline by the end of March, although recent media reports have speculated that this could be deferred until June. The pipeline would haul as much as 830,000 barrels (bbl.) per day of crude oil for 1,170 miles from Alberta to Nebraska, where a new route would avoid the state’s environmentally sensitive Sandhills region. In Nebraska, the pipeline would connect with other infrastructure to bring Canadian crude oil to U.S. refineries along the Gulf Coast.

Earnings calls

While most forecasters continue to think that ultimately the project will be green lighted, expressions of uncertainty have become more prevalent in the earnings conference calls of Canadian oil sands producers, where analysts posed more pointed questions than in the past around these companies’ ability to access refining markets in the event that Keystone XL is not sanctioned. In even more direct expressions of skepticism, several analysts downgraded their earnings-per-share estimates for TransCanada and lowered their ratings on the stock as Keystone XL is the company’s primary project to drive earnings growth in the next few years.

Should the Keystone XL project flounder, rail and barge transportation would undoubtedly become more prominent, but these modes could hardly replace the pipeline’s hefty 830,000 bbl. per day of capacity. With insufficient access to export markets, Canadian heavy oil prices are likely to come under further pressure, and they are already trading at very large discounts to both West Texas Intermediate (WTI) and global benchmarks.

The implications for the WTI-Brent differential are not as stark since the Keystone system is mostly slated to transport Canadian crude to the Gulf, rather than Midcontinent U.S. crude. With depressed prices, Canadian oil sands producers would need to alter the timelines of their expansion plans and Canada’s oil sands growth could be halted temporarily. According to analysis at RBC Capital Markets, 450,000 bbl. per day, or one-third of oil sands growth, could be delayed in the 2015-17 timeframe without Keystone XL.

Finding alternatives

There are a number of alternative avenues currently being evaluated in which Canada can dispatch its crude to export markets. First, a competitor to TransCanada, Enbridge Inc., is awaiting approval on the Northern Gateway pipeline, which is being planned to transport 525,000 bbl. per day from Alberta to the Kitimat port in British Columbia. As a deepwater port, Kitimat can accommodate large crude carriers with a high oil volume takeaway capacity.

Second, U.S.-based operator Kinder Morgan has proposed expanding its existing Trans Mountain Pipeline, which runs from Alberta to both British Columbia and Washington. The volume of the upsized line would be 890,000 bbl. per day, which is considerably larger than Northern Gateway. However, this project has yet to begin the regulatory phase, and there are concerns that the facilities it would connect with in British Columbia could only allow for smaller tankers.

While these two options focus on the West Coast of Canada, a third possibility exists for export via the East Coast of the country. TransCanada is currently assessing the viability to convert a portion of the existing Canadian Mainline from natural gas to crude oil service. This pipeline would transport crude oil from Alberta to eastern Ontario. From there, the oil could connect with other lines to move to refineries in Montreal, Quebec and New Brunswick, the latter of which also provides access to a deepwater port that would afford a multitude of shipper destinations including the U.S. East Coast, the Gulf Coast, Europe and Asia.

Only the latter two projects are comparable to the size of Keystone XL’s volume capacity, but none of them could be operational until 2017 or 2018 at the earliest, which is at least two years behind Keystone XL, if not longer. All of these projects also face opposition and potential court challenges from environmental and local groups.

With sufficient export channels, Canada’s oil sands production is forecast to grow by more than 1 million bbl. per day by 2017. This rate of development implies that oil sands supply could easily outstrip the takeaway capacity afforded by Keystone XL within about four years.

In other words, Keystone XL is not a long-term solution and regardless of whether this specific pipeline is approved, the Canadian government and pipeline operators will remain highly focused on creating additional outlets for export.